Darkest Before Dawn – BUY India – Prashant Jain

August 10, 2011

Sr. Fund Manager and the Largest Wealth Creator for Individual Investors in India, CIO of HDFC Mutual Funds Mr. Prashant Jain in a communication released just a while ago to Investors has asked to BUY the Indian Growth Story. Recall, on Oct-13, 2008, minutes after a conference call with Mr. Jain, we pushed the story – Best Time to Invest in Indian Equity and since then you have seen the returns of over 100% in 3 years and all HDFC Funds have beat this benchmark. [ Tax Free Returns ]

Excerpts from Today’s Communication to Investors by Mr. Prashant Jain,

Good returns materialize over time on investments made at cheap valuations (meaning low PEs) and PEs are more likely to be low when the news flow is adverse.

India is one of the few emerging economies that is a net importer of commodities, oil being the largest. Thus every $20 fall saves the country $18 billion p.a., equivalent to 1.1 % of GDP. Lower oil prices mean lower fiscal deficit, lower inflation, lower interest rates etc. over time.

Indian exports to US/ Europe are only 6 % of GDP. In my opinion, even these are not materially linked to how these economies perform. Consider this: Indian IT exports over last 10 years have grown at a CAGR of 25 % in USD terms compared to 6 % growth in US / European economies in USD terms. Thus, bulk of the growth (nearly 75%) has come from gains in market share, which is driven by competitiveness and nothing else.

Exports were materially impacted in 2009 after the Lehman bankruptcy as the crisis was unanticipated, due to a paralysis in bank lending and a consequent sharp inventory de-stocking. This is clearly not the situation today.

Challenges within India
Scandals were already there, that was the bad news. Their coming in the open is good news. In a democracy with coalition governments, change is difficult. In such an environment, change takes place mostly in a crisis. Right from the opening up of the economy in 1992 driven by a balance of payments crisis, to improving the security set up after the terrorist attacks in Mumbai, to increasing diesel prices when the subsidy burden was unbearable, to the likely reforms in power distribution driven by mounting losses of distribution companies, all have been triggered by a crisis.

India is in transition – the coming to light of these scandals is welcome – it will lead to change for the better in the way India functions. Some of the welcome changes that are already underway are improving transparency in land acquisition, in allocation of natural resources.

Growth of Indian Economy and GDP
The reasons for persistent rate of growth of Indian economy are so well known i.e., a young and growing population, reducing size of families, increasing incomes and affordability, rising aspirations, improving availability of credit etc, that there is no need to dwell on these in detail.

What is worth highlighting however is, why barring unforeseen developments of a large magnitude India should grow faster in the next ten than in the last ten years and could emerge as the fastest growing economy in the world.

A point worth noting here is that despite the impediments, delays, scandals and several rounds of changes in regulation, infrastructure is improving significantly.

Finally, Mr. Jain Adds,

In my opinion, there are thus several reasons to be optimistic about the growth prospects and about improvement in governance and infrastructure in India.

If you don’t believe that markets will perform over a reasonable time and if indeed that turns out to be true, then, it is even better for your long-term wealth provided you are a saver. This is so because, the longer the markets stay low, the more is the money that can be invested in equities and therefore higher will be the wealth whenever the markets finally move.